BIOS

CN, CP expected to post strong Q1 profits despite winter woes

Canadian National Railway slightly beat expectations as it earned net income of $555 million in the first quarter on a five per cent increase in revenues.

Ross Marowits, The Canadian Press
Published Sunday, April 21, 2013 8:11AM EDT
Last Updated Sunday, April 21, 2013 8:12AM EDT

MONTREAL -- Canada's two leading railways are expected to post much stronger profits in the first quarter despite winter weather woes and the impact of a slowing economy.

Canadian National Railway Company (TSX:CNR) is expected to report $528.4 million in adjusted profits on Monday, up 17 per cent from a year ago, according to analysts polled by Thomson Reuters.

That's equal to $1.21 per share on a six per cent increase in revenues to $2.5 billion.

The Montreal-based railway's carloads increased 3.3 per cent from last year, while revenue ton-miles, which measures the relative weight and distance of rail freight, grew 4.6 per cent.

CN was helped by 7.9 per cent increase in petroleum and chemicals and a 9.6 per cent boost in intermodal, offset by reductions in coals (-7.1 per cent) and grains (-4.8 per cent).

Weather was a big challenge for the railway, as storms reduced average train speeds and lengthened dwell times.

"Winter a challenge for CN this time, not CP," said Benoit Poirier of Desjardins Capital Markets, adding that CN lost some of its operating momentum.

He said the harsh weather should likely prompt CN to build a new line in Western Canada to mitigate against the risk of future weather-related issues.

The weather impact was more muted at Canadian Pacific (TSX:CP).

Yet the Calgary-based railway's volumes increased just 2.2 per cent, led by sulphur and fertilizers (+19.9 per cent) and potash and industrial products (+14.6 per cent), boosted by crude-by-rail. Automotive fell 14.6 per cent and intermodal was down 3.7 per cent as it lost contracts to CN.

Canadian Pacific's profits were forecast to increase 48 per cent to $210 million or $1.21 per share on nearly $1.5 billion revenues. The results will be reported Wednesday.

Cameron Doerksen of National Bank Financial raised his target price of CP to $118, below the current trading price, noting that the Canadian railroads trade at a large premium to its U.S. peers.

"We have a high degree of confidence in CEO Hunter Harrison's ability to lead a significant profitability turnaround at CP and the results so far have exceeded expectations," he wrote in a report.

Transporting crude has been the hottest rail segment so far in 2012, rising 31 per cent by Canadian railways and 57 per cent by Americans.

Doerksen said he expects it will be a sustainable business and could increase further.

Still, it represented only 2.3 per cent of total CN revenues in 2012 and would account for less than five per cent if revenues double as management expects.

At CP, crude represents four per cent, but could reach 12 per cent if shipments triple over the next few years as forecast.

"While this is meaningful, it will still be much smaller than CP's intermodal (25 per cent of revenues) and grain (21 per cent) franchises," he added.

While Canadian grain carloads were down 3.8 per cent in the first quarter, total production is expected to be up five per cent with exports up slightly.

Casting a cloud on the railways is a broader economic outlook that points to modest growth.

Poirier said the latest industrial production data, which is a good barometer of carload activity, points to a softer, yet positive outlook.